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The, parties agree on an interest rate for a specified period associated with a specified notional principal amount (though no commitment to lend or borrow that amount is made). For swaps, nonperiodic payments are to be allocated and recognized over the term of the contract in accordance with the values of a series of cash-settled forward contracts that reflect the specified index and notional principal amount. A straightforward interest rate swap might require one party--the "fixed-rate payer"--to pay a fixed interest rate times a notional principal amount at the end of each of the next five years; the counterparty would be required to pay the floating London interbank offered rate times the same notional principal amount at the same intervals. |
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